Get ready for a tax increase. It will be a big one.
We just don’t know when it will happen.
The problem is the federal debt. The government owes lenders outside of the government itself, the so-called “debt owed to the public,” about $14 trillion. If President-elect Donald Trump follows through on his proposals and gets congressional approval, that debt is expected to climb by $6 trillion.
With their own party’s president in office, congressional Republicans are expected to back off their insistence on cutting government spending. The deficit hawks could become rare birds.
Trump claims that his proposals won’t push up the debt. He says that, if his program is adopted, economic growth could reach three or four percent a year, producing new tax revenues to cover the added costs.
Many economists, including some in his own party, believe such growth is out of reach. Even if the President-elect were correct, more deficit spending, pushing up the debt, would arrive ahead of the supposed boom in revenues.
But Trump’s proposals are only part of the growth in the federal debt. The costs of Medicare and Medicaid could cause the debt to reach $45 trillion in about 20 years. The bill for paying debt service annually would be $1.5 trillion, a huge financial burden.
The reason for the growth in federal debt boils down to a simple proposition. The president and Congress like to adopt government programs to serve and pander to the electorate. But they don’t like to raise the taxes necessary to pay for them, so they simply borrow the money.
It is not difficult for the government to borrow, because it has such a good record of paying its debts. In fact, one constitutional amendment puts debt payments beyond debate and guarantees they will be paid.
Recently, a proposal has appeared to help deal with the debt problem. Instead of borrowing through bonds limited to 30 years, the government could replace all existing debt with bonds lasting 70 or even 100 years. The government’s new debt would be financed at today’s low rates, which are expected to increase soon.
That’s like a person with several credit card debts at high rates rolling them all into a single loan at a lower rate. The annual cost of debt payments goes down, though the payments are strung out over a longer period.
While that might help, it won’t help much if, like free-spending cardholders, the government simply keeps piling on more debt, because it could now afford it. To make extending debt repayment work would depend on a kind of discipline presidents and the Congress have not shown.
By the way, this is not a state problem. Almost all states, including Maine are required by their constitutions to have a balanced budget each year. Of course, they may incur debt, but the annual carrying costs have to fit within the annual budget for which there must be sufficient revenues.
As a result, states usually borrow to pay for long-term projects like highways and airports. The sound economic theory is that it makes sense to have future generations pay for facilities they will be using. But they shouldn’t be burdened with the cost of this year’s programs.
The federal government has not adopted a so-called “two-part budget” in which current spending, including debt service, is paid out of current revenues and capital or long-term spending is financed by borrowed money. Instead, much current expense is covered by borrowing.
Critics of federal budget deficits that increase the national debt often call for a “balanced-budget amendment.” They expect that would duplicate the state practice. If so, they would need to adopt the two-part budget discipline.
Why isn’t such an amendment adopted? To balance today’s costs, including debt service, would require an immediate tax increase. And the politicians want more programs, especially military spending, but no tax increases.
There are only two alternatives: cut spending or increasing revenues. History shows that neither Trump nor any other president is going to propose slashing programs that have powerful constituencies. Of course, government could operate more efficiently, but savings would not be enough.
Meanwhile, spending will grow and people will depend increasingly on Social Security and Medicare. As much as conservatives oppose more government, they are unlikely to eliminate such social programs. At best, they could be made to work better.
Because the debt will keep growing, the U.S. must inevitably face a big tax increase to halt more deficits and huge interest costs. Higher taxes cannot be avoided indefinitely.